Corn squeeze

From farms to refineries, Illinois has a lot to lose as Congress slices ethanol support system

Facing the end of federal subsidies and protective tariffs, Illinois ethanol makers are fighting a rearguard battle to maintain some kind of government help as their industry heads into a far more uncertain future.

With the 45-cent-per-gallon ethanol tax credit expiring at yearend, industry lobbyists are scrambling to convert the current tax break into grants for new ethanol pumps at filling stations and a standby tax credit that would kick in when the cost of gasoline drops below the price of ethanol.

It's a tough sell in a Capitol gripped by deficit-cutting fever. An industry propped up by government support for 30 years can only hope to soften the blow as Congress prepares to ax the $6-billion annual tax subsidy and a tariff on imported ethanol.

Fallout will be huge for Illinois, where about every third row of corn is used to make ethanol and the industry generates $4 billion annually, supporting about 1,200 jobs at 14 plants and employing thousands more indirectly. Led by Archer Daniels Midland Co. in Decatur, the nation's largest ethanol producer, Illinois churned out more than 10% of all U.S. ethanol made last year, ranking it third among the states.

Any slackening in production would quickly translate into lower corn prices for Illinois farmers.

“There are farmers who grow exclusively for the ethanol market,” says Adam Nielsen, national legislative director for the Illinois Farm Bureau.

Mark Marquis, president of ethanol producer Marquis Energy LLC. "We don't need to be subsidized," he says. "We just want an opportunity to get our product to consumers." Photo: Erik Unger

The still-powerful ethanol lobby is racing against time. If the tax credit expires as scheduled, it will be much harder to carve out a new special interest program in the current budget climate.

This month, the U.S. Senate voted 73-27 to kill the ethanol tax credit, a surprisingly lopsided result that underscored the subsidy's sudden vulnerability.

“I think we've realized the appetite isn't there for taxpayers to keep funding a subsidy that isn't logical or doing its job,” says Mark Marquis, founder and president of Marquis Energy LLC, who just secured a clean-air permit to double the size of his ethanol plant in Hennepin, in Northwest Illinois. “You're right in the middle of a turning of the tide. We're ready for some changes, and they're going to come. I think we need to embrace the future.”

DO THE MATH

Negotiators are discussing a compromise Senate bill that would cut the deficit while preserving some support for ethanol producers and corn farmers.

The political calculus works like this: Killing the tax credit by July 1 would create a pot of about $2.5 billion in unspent federal money that the credit otherwise would have consumed over the next few months. One leading proposal would steer $1 billion of that into deficit reduction and the rest into a new standby tax credit, support for small ethanol producers and grants for fuel pumps and other infrastructure the industry needs to compete with gasoline.

“We want to ensure that the bottom doesn't fall out of the ethanol industry after everybody's worked so hard” to build it, says David Loos, director of research and business development of the Illinois Corn Growers Assn.

“I'm not afraid to compete with oil guys. I can make my fuel cheaper than they can,” Mr. Marquis says. “We don't need to be subsidized. We just want an opportunity to get our product to consumers.”

Photo

However, the industry's proposal will falter if Congress doesn't act soon to kill the tax credit, reducing the amount of unspent federal money that could go toward deficit reduction and support for ethanol. And no major legislation has been moving through the Capitol lately.

The oil industry opposes a variable ethanol tax credit, which would increase as the price of oil drops, says Patrick Kelly, senior policy adviser at the American Petroleum Institute in Washington, D.C.

While ethanol still enjoys a federal requirement that oil refiners put an ever-increasing amount of renewable fuel in gasoline, its profitability without subsidies or import protection will depend solely on the ever-changing relationships between the prices of oil, sugar, corn and ethanol.

“Nobody knows what the real value of ethanol is,” says David Sykuta, executive director of the Illinois Petroleum Council. “A lot of people thought this day would never come.”